A Season of Mixed Signals: Which Data People Should Be Paying Attention To.


Christmas time is always one of the most joyful times of the year and many people will tell you that December is their favorite month. From gift giving to great food, most people can find at least one thing they love about the holiday season.

Daily news in December 2018 has provided some unwelcome anxiety about the economy for some though.

Our more elder Americans have been fretting about their retirement accounts as daily headlines constantly read of one of the stock market’s worst Decembers in recent history. Younger folks are getting anxious too. The market woes are what most people cite to me as why they believe the economy is going down the tube.

Is our economic situation really as bad as the news makes it out to be? The market is clearly not doing too well, but does it represent the economy as a whole? Let’s take a more in depth look at what the data from December has been telling us.

Retail’s Strong Holiday Season

With the annual holiday shopping spree now at a close, numbers are beginning to come in about consumer spending for the season. Initial reports on sales are coming in quite positive. According to data from Mastercard SpendingPulse, retail sales between November 1st and December 24th increased 5.5% from a year earlier, excluding automobile sales.

This is the strongest holiday sales growth in six years.

Although this was led by growth in online shopping (up 19.1%), traditional brick and mortar stores also saw a jump of 3.3% during the period from a year earlier. Amazon cannot take all of the glory for these numbers.

This data provides a strong testament to consumers’ spending confidence and rides on the heals of our strong labor market. As reported at the beginning of the month, unemployment held at 3.7% in November and wage growth was above 3% for a second straight month.

Confident spending during the holiday season is an important positive for the economy that is getting far less headline space than the stock market woes. Regardless of what investors are doing on Wall Street, people are spending strong as the year comes to a close, something that does not spell an imminent recession.

Prices Are Remaining Stable

Conventional theory indicates that as unemployment falls below “full employment” (estimated at about 4.5% by the Fed), businesses have to begin to push up wages to attract workers from a scarcer labor pool. As wages rise, businesses increase prices to accommodate their higher costs.

Eventually, higher prices push people away from spending and higher costs lead to layoffs by businesses. The Fed will also significantly increase interest rates to push down prices and keep them stable, adding to the higher costs for businesses. A recession then follows as the period of economic growth burns out.

As of right now, the economy is seeing the first few stages of this process. Unemployment is well below the estimated 4.5% full employment mark and wages have seen steady growth recently. How about inflation though?

A popular measure of inflation, the Consumer Price Index, held at 2.2% for November 2018 from a year earlier with volatile food and energy prices removed. This is right around the Fed’s 2% target and is not predicted to move far from here going into 2019.

If prices are stable, then the economy is likely not at a point of overheating in the near future. This stability is playing into the Fed’s plan for 2019 rate increases. Fed Chair Jerome Powell indicated only two rate hikes are likely for 2019 as the funds rate approaches an estimated 2.75-3% neutral range. If inflation were to be pushing well above 2%, we would be seeing the Fed move interest rates above the 3% mark. For example, the fed boosted rates to about 6.5% prior to the 2001 recession and about 5.5% in 2007 to push back on inflation.

Without surging inflation, people are seeing steady prices, helping to fuel the strong holiday season spending. With interest rates not soaring above neutral levels, the economy is not going to feel the pressure of borrowing costs surging above where they currently are at. As a result, steady inflation will help keep economy growing in the near future.

The Stock Market

So the economic data of December is looking good, but as most people have been seeing in the news headlines, the stock market is telling a different story.

The NASDAQ composite fell into bear market territory last week and the S&P 500 was down 19.5% at close on December 24th from its recent high. These are the gloomy numbers making everyone scream recession.

These declines represent a lot of things though, outside of economic performance. Many of the major companies in these indexes like Apple and Ford are multinationals and are susceptible to the economic performance outside of the U.S. Fears of an economic slowdown in China for example will weigh on these big indexes.

A highly automated modern stock market also faces a herd mentality as algorithms say to sell because of other people selling, not because of fundamental data. This helps make a minor drop in stocks into a major sell off like we have been seeing over the past few months.

This not to say that all market moves come outside of legit economic concerns. One of the major fears playing into investors’ actions is the on-going trade spat. In the highly integrated modern economy we live in, high tariffs over time translate into higher costs for businesses and consumers, which weigh down the economy. Again though, this is only one of many factors at play with the current market sell off.

The stock market is easy to follow on a day-to-day basis, but unfortunately does not tell the whole story of the economy. It is important for people to realize the difference between the financial markets that are driven by investors’ hunt for profits and the economy as whole that is driven by a wide array of indicators.

More Than Just The Stock Market

So the macroeconomic data points to an economy that is still going strong, but investors are thinking otherwise. News agencies will always flash stock woes as the more important headlines since they are easy attention grabbers, but it is important to know that there is more to the economy than just the stock market.

As a whole, the economy is doing much better than the stock market would lead you to believe. People would be wise to ignore the over-reported market headlines and focus more on the core macro data as we move into 2019.

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